The United States Department of Agriculture (USDA) offers a vast majority of home loan programs designed to help rural homeowners and homebuyers in towns with populations of 35,000 or less. Their flagship home loan program is called the USDA Section 502 direct home loan program, commonly referred to simply as a “USDA home loan.” This program aims to provide affordable home financing options for low-to-moderate-income families in eligible rural areas.
USDA home loans offer fixed interest rates and no down payment requirements, making them an attractive financing option for many first-time homebuyers and others who may otherwise struggle to qualify for a traditional mortgage. However, there are eligibility requirements pertaining to income limits, property location restrictions, and credit standards that applicants must meet in order to qualify for a USDA loan.
Eligibility Requirements
There are four primary eligibility criteria that must be met in order to qualify for a USDA Section 502 direct home loan:
Citizenship/Residency Status
You must be a U.S. citizen or permanent resident alien. Non-permanent resident aliens are not eligible for USDA loan programs.
Income Limits
USDA sets moderate income limits that vary based on family size and location. For 2021, the gross annual income limits range from $64,350 for a single-person household up to $115,450 for an eight-person household. Your income must be at or below the published limit for your county.
Property Location
The home you wish to purchase must be in an eligible rural area with a maximum population of 35,000 or less. Eligible areas can include towns, unincorporated areas, and suburban areas as long as they lie outside the boundaries of a large urbanized area.
Creditworthiness
While USDA loans allow for lower credit scores than conventional loans, you still need to demonstrate a willingness and ability to pay debts on time over the past few years. Loan underwriters will evaluate your credit report, debt-to-income ratios, and other credit factors.
So in summary – you must be a citizen or resident alien with moderate income under the limit, looking to buy a home in an eligible rural area, and exhibit responsible credit habits overall. Let’s explore each criterion in more depth.
Citizenship/Residency
Citizenship or residency requirements are fairly straightforward – you must be either a U.S. citizen or a lawful permanent resident alien in order to apply for a USDA loan. Non-permanent resident aliens are generally not eligible unless they are applying jointly with a U.S. citizen spouse. USDA requires documentation of your citizenship/residency status, such as a passport or permanent resident card, for verification.
Income Limits
The income limits set by USDA aim to target home financing assistance to moderate-income families and individuals. These limits are tweaked annually based on changes to area median incomes across the country.
For the current year of 2022, here are some sample income limits for USDA loans by household size and location:
- Single-person household in rural Utah: $64,350
- Family of four in rural Kansas: $85,150
- Family of five in rural New Mexico: $92,950
- Family of six in rural Pennsylvania: $100,750
Your total annual household income must be at or below the published limit for the county where the home you want to purchase is located. Both your pre-tax and after-tax incomes are counted. Self-employed applicants may qualify based on their adjusted gross income as reported on tax returns.
Property Location
Homes financed with USDA loans must be situated in designated rural areas to qualify. This includes not just farms and unincorporated land but also small towns and suburban areas that do not exceed the 35,000 population threshold. However, some major metropolitan counties may be excluded even if they contain towns under 35,000 people.
To verify if an address is located in an eligible rural area, applicants and lenders can check with the local USDA office or use the agency’s online eligibility tool. The property must be primarily for residential use as the applicant’s owner-occupied principal home. Second homes and investment properties are ineligible for USDA financing.
Credit Requirements
While USDA loans allow for more flexible credit standards than conventional loans, applicants still must demonstrate a basic willingness and ability to repay debts. Any foreclosures, bankruptcies, tax liens, or similar derogatory items on your credit report typically need to be at least three years old unless there are extenuating circumstances.
Your minimum credit score for a USDA loan can range widely depending on the lender, but is normally around 640-700 or higher for the best terms. Debt-to-income ratios comparing your monthly housing expenses and total recurring debts to your stable income are also evaluated. Generally around 43% DTI is the upper limit.
Meeting these four primary eligibility requirements forms the baseline for USDA loan qualification. Now, let’s move on to exploring the key program terms and features.
Features of USDA Home Loans
Beyond the eligibility guidelines, USDA home loans offer several attractive financing terms and benefits that set them apart from alternative loan options. Here are some of the top features you should know about:
Fixed-Rate Mortgages
All USDA loans are fixed-rate mortgages, meaning the interest rate you receive at closing will remain the same for the entire life of the loan. This provides long-term budget certainty compared to adjustable-rate mortgages, where rates can change periodically. Currently, rates on USDA fixed loans hover around 4-5%.
No Down Payment
One of the biggest advantages of USDA loans is that they allow for 100% financing with no down payment required. This removes a major hurdle that might otherwise prevent many first-time buyers from purchasing a home due to a lack of savings. The entire loan amount covers the purchase price plus any eligible closing costs.
Low or No Closing Costs
Depending on the lender, some closing costs may be waived or covered on USDA loans as well. Certain origination, appraisal and guarantee fees are standard, but many others can potentially be rolled into the loan amount at little or no cost to the borrower. Avoiding several thousand dollars in out-of-pocket closing expenses at once is a nice perk.
Competitive Interest Rates
While variable, USDA loan rates tend to stay on par with or even slightly better than comparable fixed-rate mortgage products, depending on your creditworthiness. With no down payment or PMI to account for, lenders are able to offer competitive interest rate quotes to qualified applicants.
Longer Repayment Terms
Standard repayment periods for USDA loans range from 20-33 years, giving homeowners ample time to spread out mortgage payments. This keeps the monthly housing costs very low and manageable compared to shorter 15- or 30-year conventional loans. Plus, a balloon payment is not required.
Serve Low-Income Areas
By design, USDA loans aim to increase affordable housing opportunities in rural regions nationwide. As part of its mission and income limits, the program directs its financing resources toward lower-income working families that may lack access to traditional mortgage options otherwise.
Portability
Once you secure a USDA loan, you have the flexibility to keep it when moving within any rural area of the country in the future. The guarantee carries over as long as the new home satisfies USDA lending requirements. This portability feature maintains the benefits of your loan in case of a job transfer or other relocation.
Those are some of the major highlights of USDA home loans. Now, let’s discuss popular financing options for borrowers who may not quite qualify for a Section 502 direct loan.
Alternative USDA Housing Programs
While the Section 502 direct loan is the best-known USDA home financing product, it’s not the only game in town. Here are a few alternative housing programs also administered under the USDA Rural Development umbrella:
Guaranteed Loan Program
This program allows qualified applicants who don’t meet all Section 502 guidelines to still access private market financing backed by a USDA loan guarantee. The lender provides the loan, but USDA covers part of any losses should the borrower default, allowing for more flexible underwriting. Down payments as low as 3.5% are permitted.
Self-Help Housing Loans
Through local “Mutual Self-Help” nonprofit organizations, applicants help construct each other’s homes through a “sweat equity” process in exchange for reduced USDA loan funding. No down payment is needed and payments are based on income, so this option serves very low incomes.
Individual Sewer and Water Loans
Offered in conjunction with other housing programs, these loans cover costs for private septic systems and wells that serve only one home. Interest rates are 1% with up to 40-year repayment terms.
Rural Housing Repair Loans and Grants
These programs provide funding to very-low income homeowners in rural areas to repair, improve or modernize their current homes. Grants are available for elderly applicants over 62, while loans are an option for younger incomes. Terms are generous at 1% interest for 20 years.
Now that we’ve covered the primary USDA loan programs and alternatives, let’s move on to reviewing the details of how to actually apply for a USDA home loan.
The USDA Loan Application Process
Applying for a USDA Section 502 direct home loan follows these basic sequential steps:
1. Find an Approved Lender
Only certain mortgage lenders are authorized by USDA to originate Section 502 loans. Search the agency’s website for nearby participating lenders and inquire about their application process and requirements.
2. Get Pre-Qualified
The lender will guide you through a pre-qualification where they examine factors like income, credit, debt levels, and gather documentation for a preliminary underwriting review.
3. Shop for a Home
Once pre-qualified, work with real estate agents to tour eligible rural properties for sale within your target budget. Make an offer contingent on USDA loan approval.
4. Complete the Full Application
Gather pay stubs, tax returns, bank statements, and other application forms/paperwork required by your lender and USDA rules. This begins the formal underwriting.
5. Loan Approval
If approved, you’ll sign a Conditional Commitment from USDA, locking your interest rate. Final approval may be pending appraisal results.
6. Appraisal and Closing
The lender arranges the appraisal to verify that the home value meets the guidelines. Once valued and cleared to close, finalize loan paperwork and take ownership of your new home.
On average, the full application-to-close timeline is 30-45 days, depending on how quickly requested information is provided. Keep the lines of communication open with your lender during this process.